Small-to-medium banks and credit cooperatives now represent almost a quarter of the total investments guaranteed by FGC insurance; BC acts twice to reduce risk in the banking system
BRASILIA – The accelerated expansion of the offer of CDBs by small and medium-sized banks that promise investors high profitability with the insurance of the Credit Guarantee Fund (FGC) annoys large financial institutions, worries the Bank Central and causes a chain reaction. For experts, FGC has started to be used by investment platforms as advertising to sell risky products to customers without worrying about the negative effect this generates on the financial system.
In July, a rule developed by the Central Bank came into force – the third since 2021 – to moderate the issuance of CDBs that smaller banks used to raise funds from the public on the market, offering rates of return of up to 140% of the CDI, well above that offered by large banks, whose profitability does not exceed 100% of the CDI.
The BC’s reaction came in response to an avalanche of this type of financing, which has become popular on investment platforms, but has put the government and banking system on alert. Fear increased after Congress began discussing – and continues to discuss, behind the scenes – an increase in the amount insured by the FGC for these types of applications.
The advertising of this type of investment says that, in the event of bankruptcy of the issuing bank that sold the CDB, the client is covered by the FGC (Credit Guarantee Fund), which compensates up to R$250,000 per CPF.
The fund is administered by all banks and consists of a contribution equal to 0.01% of the amount deposited in guaranteed assets, such as current accounts, savings accounts, CDBs and real estate and agricultural credit notes. In other words, everyone pays, but the smaller and riskier banks benefit from the publicity, thus managing to increase their capture of money.
The financing boosted smaller but riskier banks
Medium and small banks and credit cooperatives, outside the top of the financial chain, now represent 24% of the total applications guaranteed by the FGC. In 2019 the percentage was lower, at 16.7%.
These investments are mostly CDBs: 83% of the insured value of smaller institutions is made up of CDBs and RDBs (a smaller type of security). For comparison, in larger banks, this percentage is close to 50%.
The expansion has helped institutions little known to small investors raise money and grow. One of these banks is Master, a leader in this type of strategy. According to Central Bank data from June, the bank and its subsidiaries launched R$45.6 billion in bank term deposits on the market. The majority in the CDBs, according to the Master’s budget data.
The amount is more than eight times higher than in June 2021, when the bank launched the Master brand – before that it had another controller and was called Banco Máxima.
In this three-year period, Master’s net assets also grew from R$456 million in June 2021 to R$4.2 billion in June this year, and the bank absorbed two more brands, Voiter (formerly Indusval) and Will Bank.
When contacted, Master informed, through the press office, that the strategy has always been to diversify the financing methods and “this remains, both for assets with and without coverage (of the FGC) and, consequently, within June we have already closed R$1.43 billion in financial letters (fundraising). Financial letters are not insured by the FGC.
While the strategy has allowed the growth of smaller banks, thus reducing bank concentration, it has also added risk to the system as a whole, says FGV-EAESP professor Rafael Schiozer, who specializes in studies related to stability, risk management and to financial crises.
“Depositors deposit money into (securities of) institutions with insured deposits without worrying about the risk of the bank. In this way, there is a transfer of risk from the investor in that bank to the FGC, shared with the entire financial system,” says Schiozer . “So there is an incentive, which in economics we call moral risk, so that the banker does not worry too much about the bank’s risk (in using the money raised), nor that of the depositor, nor that of the investor. “
The practical result of this can be measured in another indicator. A tier one bank’s cost of funding was closer to that of a riskier institution, according to data from the BC Financial Stability Report from April this year.
BC reacted three times to the excesses
The Central Bank has taken three recent initiatives to moderate the speed of expansion of this type of CDB financing.
In 2021, it began requiring banks that rely heavily on the FGC’s advertising-based bond issuance to make an additional contribution to the fund. The logic is as follows: if they want to use insurance as bait, they pay more. The number of institutions that made the extra payment at the end of that year was 17. By 2023 there were already 40.
The BC noted the rapid increase in institutions willing to pay more to continue with FGC and suggested a new rule in December 2023, which took effect in July of this year, creating barriers to funding and a disincentive for the practice without ban it -. There.
“What we have noticed is that some institutions have started to look for other liabilities not covered by the FGC, which is positive because it brings more institutional investors into the game. Especially financial invoices, which are not covered by the FGC,” says the executive director of FGC, Daniel Lima.
The increase in insurance occurred through legal means
The unease in the financial market and in the BC raised sirens when, in August, during the elaboration of the Central Bank’s autonomy proposal, an amendment presented by Senator Ciro Nogueira (PP-PI) proposed to increase the amount covered by R$ from the FGC 250 thousand for CPF for R$ 1 million. Banking market participants interpreted the initiative as an attempt by smaller banks to expand already criticized activities.
The senator’s thesis, presented in the report, is to “encourage greater competitiveness” in the banking sector against “the monopoly of services for more traditional and larger institutions”.
Ciro argued that increasing the insurance to R$1 million would bring Brazil closer to the level of the United States, since the guarantee is $250,000, which would be equivalent to R$1 million. When contacted by the report, he did not want to speak openly.
The proposal was rejected by the Brazilian Federation of Banks (Febraban), the Brazilian Association of Banks (ABBC) and the National Association of Credit, Financing and Investment Institutions (Acrefi). The thesis is that the current guarantee limit, of R$ 250 thousand, covers over 99% of depositors and approximately 50% of requests.
“Increasing this guarantee to R$1 million would have no impact on the protection of depositors and vulnerable investors, but, on the other hand, would increase the cost of financial institutions with negative effects on the supply and price of operations Furthermore, the increase in the ordinary guarantee would increase moral risk, facilitating excessive indebtedness by financial institutions and potentializing the formation of banking crises”, reads the note from the banking associations.
The initiative was also opposed by the president of the Central Bank, Roberto Campos Neto, who, according to the rapporteur of the BC autonomy proposal, Plínio Valério (PSDB-AM), is not satisfied with the initiative and stated that it would distort the ‘original content of the proposal, which is focused on the functioning of the BC. The amendment ended up being rejected. When contacted, the BC did not respond.
THE Estadao considered, however, that the issue was not dead and the political agreement reached at the time of the publication of the amendment was that the proposal did not enter into the autonomy of the BC PEC, but that it could be part of another bill, which sources of the Senate and the banking market has no doubt that this can happen.
The bigger question is what the Lula government will do. Members of the economic team have expressed, behind the scenes, their opposition to the increase in the FGC limit and the risk caused by the rapid increase in funding from smaller banks. The proposal, however, contains another point that could be of interest to the government: the nationalization of the guarantee fund.
In June it had deposited just over R$107 billion with the FGC, now of a private nature. A senior banking industry source said he feared the government might be interested in absorbing the amount for the National Treasury. For the government it would be interesting because the revenues arrive first and the expenses only later, to be able to compensate if the bank fails.
When contacted, the Treasury did not respond.
FIND OUT MORE
What is FGC?
This is a fund that guarantees amounts deposited in the financial system of up to R$250 thousand per CPF. It is managed by the associated banks, which collect 0.01% of the total deposits eligible for insurance coverage.
What products are insured?
Deposits on request or withdrawable with notice; savings; real estate and agri-food letters of credit; bills of exchange; mortgage notes; term deposits, such as CDB and RDB; repurchase agreement transactions of associated companies.
